Social Security is a key component of retirement income for most retirees. The decision when to claim benefits can be crucial, and financial advisers can offer expertise and perspective on the options. Here are some factors to take into account in advising them.
Most retirement savers can commence their benefit as early as age 62, but they will receive a significantly higher benefit if they wait until they reach their full retirement age (FRA) of 66 and some months for those born prior to 1960 and age 67 for those born in 1960 or later. Clients claiming their benefits at age 62 will see a reduction of up to 30% versus waiting until they reach their FRA.
Their maximum benefit will be realized by waiting until age 70 to make their initial claim. Between their FRA and age 70, their benefit level will increase at an 8% annual rate.
Claiming a benefit early will result in a permanently reduced benefit. This is the level that future cost-of-living adjustments will be based upon as well.
You can help your clients do a break-even analysis that will show them the age at which their total benefits from waiting to claim will surpass their total benefits from filing early. This is often into their 70s or beyond.
Are They Still Working?
If your client has not yet reached their FRA and they are still working or self-employed, it may behoove them to wait to file. That’s because over a relatively small level of earned income, their benefit will be reduced by $1 for every $2 worth of earned income. For 2020 that level is $18,240. The limit is higher in the year that they reach their FRA. While clients will receive the benefits withheld once they reach their FRA, it may just make sense to wait until they reach their FRA to file, when they will also receive a higher benefit as well.
Health and Longevity Issues
If your client has health issues or a family history that does not include much longevity, it can make sense for them to claim their benefits early. This may provide a greater total lifetime benefit than waiting until their FRA. Each client’s situation is different, but this is an issue that should be considered.
What other resources does the client have that allows them to defer claiming their benefit? If they are working, perhaps they are drawing a pension from their former employer or they have sufficient assets in retirement and other investment accounts. If this is the case it can make sense for them to wait until their FRA or even age 70 to claim their benefits. This will provide a larger monthly benefit, one that will be there as other retirement assets are spent down.
If your client is a couple, there is some planning to do. One situation might be that one of them has a significantly larger benefit than the other. In this case it makes sense for that spouse to delay filing as long as they can, all else being equal. This ensures that if that spouse dies first, the surviving spouse will receive the largest possible survivor benefit.
If both spouses are in good health and working into their 60s, it may make sense for both to wait until at least their FRA and perhaps until age 70 to claim their benefit. They likely won’t need the money before that, and this will provide the maximum benefit into retirement for them.
Issues for Single Clients
Since these clients have only their own retirement savings to rely on, if they are healthy, have other resources and perhaps are still working it makes sense for single clients to wait as long as possible to claim their benefit. This will provide the largest monthly benefit throughout the rest of their life.
For single clients who are divorced, they can claim a benefit based on their ex-spouse’s earnings record if that benefit is higher than their own. In order to claim this benefit, they must be:
- At least age 62
- Not remarried
- They must have been married to their ex-spouse for at least 10 years
- Their own benefit must be lower than the benefit they would be entitled to from their ex-spouse’s earnings record
- They must be eligible for Social Security benefits
The maximum benefit an ex-spouse can receive is 50% of their ex-spouse’s benefit at their FRA, they received this by waiting to file at their own FRA. The benefit will be reduced by filing earlier.
If they do remarry, then the ability to claim a benefit based on their ex-spouse’s earnings record stops and they will need to claim their own benefit.
For clients who are widows or widowers, they can claim a survivor benefit or their own benefit, whichever is larger. Survivor benefits can grow over time, if they can wait until their FRA to claim the benefit it will be larger than if claimed as soon as they become eligible. Survivor benefits can be claimed as early as age 60, recipients can switch to their own benefit when they are eligible or wait as late as age 70 to claim if their benefit is larger.
When advising clients on the best time to claim their benefits, it's important to look at the factors impacting their situation to help them make the best decision for their unique circumstances.